A quarter of a century ago, three years before the Berlin Wall collapsed – with brightly painted fragments turning up in our London office the very next day – I investigated the prospects for sustainable capitalism in The Green Capitalists. The book's concluding chapter was contributed by Tom Burke. And his last paragraph noted that, "Socialism, as an economic theory, though not as a moral crusade, is dead. The argument now is about what kind of capitalism we want."

True enough, but – at least in retrospect – the sustainability movement has been much more successful in encouraging leading companies to sign up to various versions of the agenda than it has been in transforming markets to ensure that business is properly rewarded for moving beyond words to action. This has been as much a government failure as it has been a market failure. And the net result is often that chief executives and other C-suite executives find themselves caught between the rock of societal pressures and the hard place of short-term performance-obsessed markets.

This would be less of a problem if the institutions of global capitalism showed a consistent ability to learn from experience, but the latest evidence suggests that the world's financial markets – and its stock exchanges, in particular – are once again in the process of developing a vast bubble, but this time it is one that threatens to overshadow the still unfolding economic meltdown in Europe and the United States.

Having written my first report on climate change in 1978, I have been dutifully tracking the evolving science for half a lifetime, but only on Friday 15 July 2011 did I truly feel that the climate, carbon and financial agendas had been spot-welded in a way that potentially brings all of this right home to people such as asset owners, rating agencies, brokers, analysts, investment bankers, accountants, data providers and financial regulators.

Significantly, perhaps, most of those folk didn't turn up for the launch of Unburnable Carbon, the first report from the Carbon Tracker Initiative which poses the critical question: are the world's financial markets carrying a carbon bubble? Or, to put it another way, are there more fossil fuels listed on the world's stock exchanges than can be burned in a world committed to limiting global warming to 2C? The answer is that 80% of the carbon assets listed are unburnable.

It's hardly surprising that those blowing the bubble don't want to hear the bad news. As a result, the launch of Unburnable Carbon, held in London's Canary Wharf, surrounded by the sparkling towers of many leading banks, attracted a fair number of people one participant jokingly described to me as "climate change luvvies".

In one sense, he was right – certainly I recognised many faces – but it was also striking that those present included people who manage climate and carbon issues for some of the world's best-known financial institutions. And the luvvie-spotter himself works for Richard Branson's Carbon War Room – and was en route to a meeting hosted by the International Maritime Organisation at which major new greenhouse gas emission controls would be announced for the world shipping industry.

It also struck me that some participants who have been in the game for quite a while are now in the process of developing initiatives that aim to address the immense scale of the challenges we face.

Take Peter Head of Arup, a pioneer in sustainable urban design, who is energetically fundraising for the new Ecological Sequestration Trust, whose towering ambition is to capture the carbon dioxide from coal-fired power stations in countries like China and India, feeding the resulting gas streams through algal bioreactors to create an array of soil improvement products and fertilizers that can be used in intensive horticulture and agriculture operations nearby. (Interest declared: I am acting trust chairman for the launch period.)

To ensure that such ventures have a better chance of success, carbon must be properly priced in stock markets and in corporate valuation and accounting processes. But there's a systemic problem here. The Carbon Tracker analysis concludes that, in contrast to Germany's equivalent, the London Stock Exchange is hugely exposed to new forms of carbon risk.

As one participant put it – he made it clear that he was speaking in a private capacity rather than as an employee of the major financial institution he is just joining – "London prides itself as a green capital, but is really the fossil fuels capital of the world."

Strikingly, 70% of the initial public offerings in London in the first six months of 2011 were for mining companies. Companies such as BP, Royal Dutch Shell, BHP Billiton, Anglo American and Xstrata were recently joined by Glencore – with one panellist claiming that the company's giant prospectus didn't once reference climate change risks.

With less than one fifth of 1% of the world's coal, oil and gas reserves, and accounting for less than 2% of global consumption of fossil fuels, this country tends to think that it has a relatively small carbon footprint. But factor in stock exchange listings and we turn into a carbon colossus.

"A century ago London was cashing in on carbon," London's Mayor, Boris Johnson, said earlier in 2011, noting that the City must now "harness the wealth of investment opportunities" generated by the shift to a low-carbon future. Unfortunately, it looks as if we still have a pretty huge carbon habit – and, in the process, the City is once again helping to build a largely invisible financial bubble, spreading the risk across the entire financial system and, ultimately, putting the entire country at risk.

When one participant asked how the panel would spend £50m on lobbying, Tessa Tennant, a leading pioneer of green investment, suggested spending it all on a national advertising campaign to alert Britons well beyond London that their futures are once again being put at hazard. People in the rest of the country are furious with the City, she warned, so the backlash could well dwarf the media and political frenzy around News International.